Chinese Innovation and Entrepreneurship

1. Wegrzyn 1 Matthew Wegrzyn Professor Richard Tudway Global Political Economies 22 February 2015 Chinese Innovation and Entrepreneurship: An Ebb and Flow What factors have restricted the development of in entrepreneurship and innovation in China? What reforms have been introduced to bring about improvements in these areas? What are the preconditions and prospects for lasting change? To fully understand China’s problematic relationship with innovation and entrepreneurship, the timeline begins on a podium overlooking Tiananmen Square on October 1st, 1949. There, Mao Zedong, the leader of the Communist Party, proclaimed the creation of the People’s Republic of China after 13 years of civil war against Chiang Kai-shek’s Nationalist party. Soon after, the Chinese economy became entirely socialized, embodying Soviet procedures and ideals. Under this new government, “agriculture was collectivized, industry was nationalized, and the private sector was eliminated by 1956.”1 However, China soon became turbulent economically and politically. The unrest prompted Deng Xioaping, a high ranking government official, to formulate the Four Modernizations in 1978, which set the path for the modern Chinese State. It allowed regional governments to regulate agriculture, modernized industrial necessities like coal and steel and modified the Chinese education and national defense systems.2 These motions helped China develop into an industrial country with a newly vested role in the international community. After the Four Modernizations, the earliest forms of 1 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of East Asian Studies 1 (2001): 27-33. Web. 2 Ebrey, Patricia Buckley. "Four Modernizations Era." Four Modernizations Era. Freeman Foundation,n.d. Web. 13 Feb. 2016.

2. Wegrzyn 2 entrepreneurship, beyond black market operations, emerged from township and village enterprises (TVEs). These firms were “collectively owned under local governments” but were intended to create jobs for newly unemployed farmers after the decentralization of agriculture.3 As a result of less regulation, TVEs were able to operate as businesses by creating supply chains, aiming for profits, and altering production as the market dictates. The creativity and flexibility of these firms were a stark contrast to the derivative nature of state owned enterprises (SOEs). SOESs controlled entire industries, especially within science and technology, which were two main areas of growth and creative destruction. China has developed into an international superpower, with enough economic, political, and defensive clout to rival the United States. Even still, China is severely lacking in the areas of entrepreneurship and innovation. This phenomenon is commonly recognized as a key weakness in the Chinese state, especially as the country attempts to shift from a manufacturing based economy to one rooted in service and innovative industries. The Chinese government has recognized this flaw, thus inserting a variety of incentives and small policy shifts in the late 80’s to the mid-90’s. In 1987, China’s Congress repealed a law that stated private businesses could have only 7 employees. Through this, more banks were willing to give loans to entrepreneurs and functioning businesses were able to grow. The number of private enterprises increased by 93% in 1987 alone.4 Venture capital (VC) was introduced as a concept soon after, becoming an active enterprise in 1996. However, VC did not become a viable sector until 2006 after favorable policy shifts and the entry of foreign venture capital firms boosted the market. One of the most important developments, not only for Chinese enterprises but for the nation as a whole, was a law passed in 2004 that gave Chinese citizens the 3 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of East Asian Studies 1 (2001): 27-33. Web. 4 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of East Asian Studies 1 (2001): 27-33. Web.

3. Wegrzyn 3 right to private property, which continued to open up the door for entrepreneurs to start their own businesses.5 While these initiatives were instituted to help China shift from its manufacturing centric economy, it was not until 2012 when President Hu Jintao indicated “in a report… that [China] would transition into an ‘innovation-driven economy’” that set the vision for how the nation would hope to develop.6 In this paper, I will examine why the Chinese economy has lagged in respect to innovation and entrepreneurship up until now and how China has combatted these tendencies to move toward an ‘innovation-driven economy.’ China has been void of entrepreneurship and innovation for the majority of its history. Once the empire that created gun powder, the compass and papermaking, China has deteriorated its creative capabilities for the benefit of cheap manufacturing and SOEs. There are a myriad of factors that have contributed to the fall and suppression of entrepreneurship and innovation. However, it is important to define those two buzzwords. Entrepreneurship is a more precise idea than innovation. It is one’s ability to start, develop, and grow one’s own business. Innovation, however, is a harder idea to pin down. When referencing innovation in this context, it is “the introduction or adoption of new products, new production processes, new ways of organization and management, new methods of marketing and, new business models.”7 This definition permits a wide perspective on the Chinese economy across multiple facets of enterprise. There are many ways, however, to measure entrepreneurship and innovation with precise figures and markers. The central factors that are responsible for China’s lack of innovation and 5 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census. Technovation (2010), doi:10.1016/j.technovation.2010.05.003 6 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016. 7 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.

4. Wegrzyn 4 entrepreneurship lie in China’s business resources and the government’s relationships with small and medium enterprises (SMEs). The first core factor that has restricted Chinese innovation and entrepreneurs lies in the poor enterprise resources for SMEs. Start-ups and small businesses have long been a sliver of China’s vast economy. Dominated by state owned enterprises (SOEs), 45% of China’s GDP in 2011 was through SOE operations.8 “SMEs have contributed substantially to commercial exploitation of new product and rapid diffusion of new technology,” throughout the world. They drive industrial evolution, creative destruction, and promote firm flexibility. All of these characteristics drive innovation and are the opposite attributes of SOEs.9 However, the business environment in China has long been detrimental to entrepreneurs and small businesses. Three main areas that have restricted China’s growth in innovative fields are skilled labor markets, availability to financing, and Chinese culture itself. China has always been afflicted by a ‘brain drain,’ especially with university students. In 2012, 24 million native students enrolled in Chinese universities, a figure that has only recently overtaken the United States, which stands at 20 million. In 1998, China had a student enrollment of 3.4 million compared to America’s 14.5 million. Despite exceptional growth in Chinese student enrollment since 1998, over 200,000 students enroll in United States universities in any given year, many staying in America with their newly acquired skills.10 From 1978 to 2013, over 1 million Chinese students went abroad for study and research.11 Many skilled students and workers have left China to remain in more 8 USA. Congress.US China Economic and Security Review Commission.USCC.gov. By Andrew Szamosszegi and Cole Kyle. N.p., 26 Oct. 2011. Web. 15 Feb. 2016. 9 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016 10 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016. 11 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016

5. Wegrzyn 5 innovation friendly environments such as the United States and Germany. Those with the skills who do stay in China have minimal experience and are not loyal to their employers because their skills are scarce, constantly switching companies for the highest salary, commonly offered by SOEs.12 Another deterrent to the entrepreneurism in China has been the poor financing options open to SMEs. Researchers interviewed 82 managers and CEOs of small business throughout China, across multiple industries. Lack of access to financing was labeled as the second largest detriment to innovation, only behind unfair competition with SOEs and large monopolistic firms. Venture capital is only a decade old in practice and banks do not wish to put excessive risks into SMEs. The study also showed that “less than 10% of private enterprises can obtain bank loans and less than 1% are able to obtain other external financing from capital market.13” As a result, many SMEs are self-financed, which makes entrepreneurs reluctant to invest in R&D and other long term projects, when profits and strong cash flow need to be realized in the short term. Without skilled labor and financing, entrepreneurs are unable to accumulate the necessary resources to fully develop and grow his or her business. This in turn, has led to stagnation in entrepreneurship and innovation. China’s culture certainly has had an influence on innovation and entrepreneurship. While it may not necessarily be as direct and measured as lack of enterprise resources, the impact can certainly be observed. Confucian principles have permeated Chinese society for generations, spreading values such as persistence, diligence, thrift, and harmony. Chinese entrepreneurs are in constant flux because traits like openness to change and flexibility contradict Confucian edicts, 12 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of East Asian Studies 1 (2001): 27-33. Web. 13 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016

6. Wegrzyn 6 noted in a study comparing the characteristics of Chinese entrepreneurs to SOE mangers.14 In this same study, it found that Chinese small business owners had two traits that surpassed all other entrepreneurs throughout the world: political nimbleness and interpersonal harmony. These are directly connected to the Confucian ideals and the political climate they have grown in, where entrepreneurs need to navigate legislation, red tape bureaucracy, and high ranking officials in government. Another cultural hindrance is the Chinese education system, which has been characterized as a platform for respect and knowledge absorption rather than critical thinking or challenging philosophies. This has been observed by some researchers to decrease creativity in younger generations.15 One interesting detriment that can be connected to China’s culture is the performance of domestic venture capital firms (DVCF) compared to foreign venture capital firms (FVCF). DVCFs and the firms they invest in tend not to increase R&D expenditure while FVCF’s clients have been known to greatly increase the internal investment.16 This is a manifestation of Confucian ideals in Chinese business. DVCFs do not want to disrupt harmony and maintain levels of investment, minimizing risk. FVCFs from different cultures, like the US and the EU, tend to increase R&D expenditure, a sort of gamble with the intention of disrupting the status quo through innovation. While culture is not a central factor, it is a certainly key part of the quandary that restricts Chinese entrepreneurship and innovation. The second core factor that has been restricting small businesses has been the Chinese government. The People’s Republic of China has had a complicated relationship with small business owners since the creation of the communist state. The government imposed a number of 14 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of East Asian Studies 1 (2001): 27-33. Web. 15 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016. 16 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web.

7. Wegrzyn 7 regulations and policies that contracted SME creation and growth. Consequently, up until the late 1990’s, there were few effective intellectual property and fair competition laws. Even after legislation was enacted, many firms were at the mercy of multilevel bureaucracy where the local, provincial, and national government systems all had different interpretations and agendas in regards to the law. More than 55% of SMEs indicated that the government created barriers to innovate and grow through unfair competition, lack of regulations, and lack of SME support.17 The Chinese state commonly gives preferential treatment in terms of subsidized loans and legal configurations to SOEs and multinational enterprises (MNEs) that are Fortune 500 companies. Another important aspect of how the government has hindered innovation and entrepreneurial thought is through the lack of general regulations, especially in terms of intellectual property rights (IPR). In order to join the WTO, China had to agree to a minimum level of IPR. These regulations were loosely enforced, which harmed certain industries tremendously, most notably in science areas. This area is where innovation across the globe has been most evident. Comparing China’s share of global revenue in biotechnology, semiconductor design, specialty chemicals, or pharmaceuticals sectors to their share of global GDP in 2013 (12%), China has less than 3% of the world’s revenue in these areas.18 Similarly, the aviation, consumer electronics, and automotive, industries are all below China’s world GDP market share. These distinct laggards are directly connected to loose IPR laws. Weak government regulations hurt all sizes of enterprise from SOEs down to small tech startups. However, due to preferential treatment from the government, SOEs are more likely to have legal action upheld in terms of IPR when compared to SMEs. Intellectual property protection and innovation are strongly correlated in 17 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016 18 Woetzl, Jonathan."Gauging the Strength of Chinese Innovation." McKinsey & Company.N.p., Oct. 2015. Web. 18 Feb. 2016.

8. Wegrzyn 8 private firms because innovation through R&D expenditures and patents are much more sensitive to weak IPR than SOEs. For example, private firms in provinces within China that have relatively high IPR have 40% to 100% more R&D stocks/assets, meaning they were able to develop more innovations, more efficiently.19 Not only are SMEs developing more than SOEs through R&D, but the quality of the patents, nationally and internationally, are better. Private firms’ patents have received 3.19 citations per patents from 1990 to 2014 while SOEs have only 1.36 citations in the same period. 20 These developments are despite weak IPR laws and enforcements that have hindered all levels of enterprise, but specifically SMEs. However, Chinese patents as a whole are only recently gaining strength on an international scale. Triadic patents, intellectual property that are filed in the EU, US, and Japan, are indicators of innovative strength throughout the world. While China was granted 172,113 patents, the highest amongst developing nations, China’s total number of triadic patents is less than one tenth of the US or Japan.21 This is a prime example of how poor IPR laws can hurt all levels of enterprise, on a national and global scale. Another piece of how the Chinese government has hurt SMEs is through the strict oversight of small business operations. The Communist party, despite modernizations and policy alterations, still has a heavy hand in the way business operate. A prime example of this is the government’s everyday interactions with SMEs where “the Communist Party requires a representative to be present in every company with more than 50 employees. Every firm with more than 100 employees must have a party cell, whose leader reports directly to the party in the 19 Feng, Lily, Josh Lerner, and Chaopeng Lu. "Intellectual Property Rights Protection, Ownership, and Innovation." Iowa State University, 9 June 2015. Web. 18 Feb. 2016. 20 Feng, Lily, Josh Lerner, and Chaopeng Lu. "Intellectual Property Rights Protection, Ownership, and Innovation." Iowa State University, 9 June 2015. Web. 18 Feb. 2016. 21 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016

9. Wegrzyn 9 municipality or province.”22 This organizational structure is detrimental to the proprietary nature of a firm’s strategic direction, operations, and competitive advantage, thus constraining normal competitive behavior. All of these enterprise drivers are hindered, creating an unsatisfactory environment not only for SMEs, but for any firm that is not directly linked with the government, like an SOE. Incentives are also an important aspect of innovation development, a system China has yet to completely adopt. “The biggest gap between China and the most innovative countries is… the lack of effective incentives to stimulate efforts and creativity for novel innovation and to guide efficient allocation of resources.”23 Some incentives that create a sound enterprise include competition, security on a macro and micro level, advancement of IPR, and complete financial accessibility. Not coincidentally, these are the exact concessions that SMEs managers and CEOs cited as barriers for innovation and entrepreneurship. The Chinese government has played a significant role in neutralizing and compromising innovation and entrepreneurship. Ironically, although Chinese innovation and entrepreneurship has been restricted, there have been several government initiatives to develop the country in both areas since the 1990’s. Leadership in China has been examining the economy closely, focusing on vulnerabilities to correct. Two traditional sources of growth for the economy has been its labor force and return on capital. However, both areas are trending downward. The working age population will decrease by 16% by 2050 and it takes approximately 60% more capital to correspond to a 1% growth in GDP in 2010 compared to 1990. Stemming from this, to maintain a growth rate of 6%-7%, it has been estimated that innovation, measured as multifactor productivity (% of GDP left after 22 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016. 23 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.

10. Wegrzyn 10 subtracting three main factors of production), must make up 35% to 50% of GDP growth.24 These figures have been in the government’s perspective for decades. With the structure of China’s changing economy, “China’s cost competitive advantage has gradually lost, and the cost strategic development of enterprise is facing severe challenges.”25 China’s days of being the cheap manufacturer of goods has grown to a halt because of the declining labor, effective capital, and increased competition from other developing countries. While there have been many restrictions and detriments to innovation and entrepreneurship, China seeks to become a world leader in developing new products and processes throughout businesses. China is performing this shift through government policy and institutions such as universities and R&D centers. As analyzed earlier, the Chinese government has a multitude of restrictions to innovation and entrepreneurship at all levels of governance. Yet, since the start of the new millennium, it has sought to alter its role in the world economy. China focused on manufacturing for the majority of its modern history yet since “the middle 1990’s, China has tried to build an industry- centered national innovation system and has dramatically increased its investment in science and technology.”26 Through internal investment, China has begun focusing on what new technologies and scientific contributions it can develop through its own enterprises, government entities, and capital, thus creating its own national innovation system (NIS). It has done so through investment and policy alterations. One of the most important initiatives China has put in place is its R&D expenditure, as it is one of the best ways to improve the innovation capacity of a nation. From 1996 to 2009, the Chinese government has increased its R&D investment as a percent of 24 Woetzl, Jonathan."Gauging the Strength of Chinese Innovation." McKinsey & Company.N.p., Oct. 2015. Web. 18 Feb. 2016. 25 Hao, Xian Feng, Yun Sun, Wen Yan Tian, and Zhe Yu Pan. "Analysis on Innovative Incentive Policy in China." Atlantis Press,2015. Web. 21 Feb. 2016. 26 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census. Technovation (2010), doi:10.1016/j.technovation.2010.05.003

11. Wegrzyn 11 GDP from .6% to 1.7%.27 Growing at an annualized rate of 13.3%, China has put itself on pace to raise R&D percentage to 2.5% to be on par with other OECD nations such as the US and Japan by 2020.28 29 In 2014, China’s R&D expenditure was 2.01 %.30 Furthermore, the Chinese government has recognized the importance of strong intellectual property laws. As a result of better enforcement, China’s patent grants has been growing exponentially. In 2012, China’s patent office granted 1.26 million patents, a 31% increase and the most of any country in the world. China also grants close to 80% of applicants his or her patent, significantly higher than the US rate, which lies below 50%.31 China has helped itself in a multitude of ways by terms of shifting its policies. One example is with venture capital. Although it was introduced as a concept and open to universities, corporations and individuals in 1996, foreign firms were unable to invest in Chinese companies. In addition, the domestic firms were made up of former government officials and SOE managers who had no experience in venture capital. However, in 2005, the Chinese government shifted policies greatly to allow new foreign firms to come in, which now make up 65% of the total investment pool, along with domestic changes such as the right to private property, legalization of convertible securities and preferred stock and the ability for SMEs to be listed on the Shenzhen stock exchange.32 In the same study, the researchers found that firms backed by venture capitalists have higher labor productivity, greater net profit per employee and, invest more in R&D, all of which are significant drivers of innovation and 27 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016. 28 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016. 29 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census. Technovation (2010), doi:10.1016/j.technovation.2010.05.003 30 "World Development Indicators | The World Bank." World Development Indicators | The World Bank. World Bank, 2015 Web. 21 Feb. 2016. 31 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web. 32 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web.

12. Wegrzyn 12 entrepreneurship. Furthermore, China has tried to alleviate its own brain drain by implementing the ‘National One-Thousand Plan.’ To increase the talent pool for the government and China’s firms, the Chinese government is offering positions to entrepreneurial, “pioneering talents” who have a Master’s or PhD in a creative area and is below the age of 55. He or she would be paid 1 million yuan a year in addition to incentives such as health care, housing, insurance, and alleviation of taxes.33 These forms of incentives are in all levels of government, illustrated in how the Beijing mayor put out a similar program, focusing on science and technology. These policies are important in order to ensure that China’s best innovators, inventors, and entrepreneurs do not immigrate to America or another nation in order to advance their ideas and ventures. The final policy shift to discuss is China’s alteration in foreign direct investment (FDI). From 2010-2014, China has shifted its FDI from risky ventures in Brazil and Africa to more secure, innovative investments. For example, in 2010, the largest area of outward FDI was in oil and gas, intended support a majority manufacturing economy. However, in 2014, the number one and two areas of outward FDI were computers/electronics and mining. Through acquisitions of companies like Lenovo, the Chinese have tried to not only grow innovation and entrepreneurism from within, but they are looking to acquire it from outside the nation. The mining investment allows China to further expand its portfolio of rare earth metals, essential for the production of electronics. In terms of inward FDI, an interesting wrinkle was that in 2014, FDI for the service industry sector increased by 7.8% while the manufacturing industry suffered a double digit loss.34 This reflects China’s shifting economy. Through all of these changes, the Chinese 33 Hao, Xian Feng, Yun Sun, Wen Yan Tian, and Zhe Yu Pan. "Analysis on Innovative Incentive Policy in China." Atlantis Press,2015. Web. 21 Feb. 2016. 34 Fung, Peter. KPMG. Rep. KPMG International, 2015. Web. 21 Feb. 2016.

13. Wegrzyn 13 government is keeping a keen eye on how firms, large and small, start up and seek to create new ideas and processes. The second main way China has begun the shift to an innovation driver is through institutions such as universities and R&D centers, both in-house and independent. The Soviet Union was the original model for Chinese entrepreneurship and innovation. The research, education, and manufacturing arms of research institutes, universities, and SOEs were siloed from one another, separate by thick government regulation and oversight. China has since progressed from those draconian laws, largely because the Chinese government recognized in the late 1990’s that allowing collaboration amongst those three arms would grow the economy, both in the present and future. One of the first steps taken was on the university level. China graduated the most science and engineering undergraduate and graduate students in 2012, with 6.7 million receiving degrees.35 China has consciously invested into creating more higher education systems and also increased admissions into areas such as science and technology. The central idea driving the Chinese higher education is increased exposure to areas of innovation and high potential growth. By integrating universities with firms that can either add to new ideas and/or realize those concepts, China has increased its creative base that is most likely to innovate and start their own businesses. R&D institutes, both within businesses and independent, are also central to China’s innovation and entrepreneurial growth. While there are public R&D centers, they tend to be less efficient and effective than their individual counterparts. An important new trend are multi-national enterprises (MNEs) that have begun to shift entire R&D wings to China, in search of the burgeoning talent pool emerging from universities with masters and PhD 35 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.

14. Wegrzyn 14 degrees. In 2004, there were around 600 R&D centers in China and in six years, that number more than doubled to surpass 1,200.36 As industrial firms are making up more than 70% of China’s R&D spending, results are being seen. An empirical study said that for every percentage spent on R&D, there was a .59% increase in patents granted to employees and a .53% increase in share of new product sales. 37 These figures demonstrate the power of reinvesting in developing new ideas and technologies. R&D translates to increased sales, products, and possibilities for the future. China has wisely supported the integration and expansion of universities and R&D centers, which have developed a new generation of engineers, creators, and entrepreneurs that will fuel China’s future. China is a lexicon of cultural barriers, political ambiguity, and economic paradoxes with a complicated history with the capitalistic practices of innovation and entrepreneurship. In the Maoist era, with procedures and an economy modelled after the Soviet Union, there was no room for SMEs outside of black markets amongst nationalized agriculture, steel production, and manufacturing. Only after the Four Modernizations did China finally begin the process of becoming a modern nation. Yet there were a number of policy and ideal shifts that did not crystallize until the late 1990’s, early 2000’s. At that point, China’s economy was accelerating without signals of slowing down. Yet the Chinese government realized this growth would be unsustainable as a manufacturing centric economy. Therefore, China set its sights on the service industry and the weakest aspect of its economy: innovation and entrepreneurship. Chinese SMEs have long suffered under lack of funding, minimal public support, and inadequate labor. In addition, the government had a number of elements that hurt small business development such as 36 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016. 37 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census. Technovation (2010), doi:10.1016/j.technovation.2010.05.003

15. Wegrzyn 15 the dominating SOEs, minimal IPR, and oppressive Communist oversight. That being said, China has begun to shift, internally as a government and externally in higher education and business institutes. The Chinese government began to institute pioneering talent initiatives, making it more attractive to be a researcher and entrepreneur. Enforcement of intellectual property laws and the availability of financing helped innovation and new businesses expand. However, China still has much further to go. It is still a developing nation under a tight government controls. Less oversight from the Communist party is needed to succeed in the model of capitalism that the country is pursuing. It is still unknown whether all of the new initiatives, procedures, legislation, and capital will help China reach its goal of becoming an innovation driven economy. China ranks seventh in the world in terms of innovation performance, behind the likes of Korea, USA, Japan, the EU, Canada, and Australia.38 China has put in the mechanisms in order to change from a country that relegates innovation and entrepreneurship to one that helps it blossom but the dichotomy of growth versus control still rings true. The influence of China’s social and governance culture restricts a China that could be boundless with innovation potential and entrepreneurial spirit. By continuing to invest in new technologies and ideas through R&D, pouring capital into higher education, and shifting the culture away from nationalized industries, China will succeed in becoming an innovation driven economy. How long that will take boils down to whether the political and economic landscapes continues its inertia towards bustling innovation and entrepreneurship. 38 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.

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